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Pedro Perez—Former President, Tabacalera

A talk with the man behind Tabacalera, Spain's $7 billion tobacco company.

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CA: Incentives for the workers?
Perez: For the workers. Both for the farmers and for the workers in the factories. For instance, this year the mechanism is the following: You have an incentive in dollars, if the farmer surpasses the program. This year, for instance, 38 percent of the farmers are receiving incentives.
CA: Is there any chance of getting more involved such as actually owning farms or doing the farming yourself?
Perez: This is not the target. Our target is to secure that in three years the production of leaf tobacco and cigars doubles.
CA: So you're hoping that your 27 million cigars in three years increases to 54 million? You would be very happy! You didn't really respond to the question of your future with General Cigar.
Perez: Well, the deal is still pending.
CA: I assume that one of the great benefits to General Cigar, and to you as an owner of General Cigar, is that instead of taking two to three years to negotiate who owns the Cuban brands, after the embargo is lifted, you can basically press a button, get two jets and fly them up and you're in the Cuban cigar business in America before anybody else. Particularly when it's a brand that they already own, that you have the worldwide rights to. Right? Like Partagas. You could be first!
Perez: Yes. If our Cuban friends share this strategy, we could be in a position to offer our American partner a direct and rapid way of introducing a brand like Partagas to the U.S..
CA: Besides Partagas, what other brands do you own?
Perez: General Cigar also owns Ramon Allones, Cifuentes and Cohiba for the U.S. markets.
CA: There is a question with Cohiba. General only owns the name Cohiba but not the logo art? Who else owns it?
Perez: The Cubans.
CA: This would give General Cigar a huge advantage when the embargo is lifted, particularly if the embargo isn't lifted for three or four years, which gives you enough time to build an inventory and warehouse an inventory so that when it happens, you not only have the legal issue resolved, you have the inventory in place. What this may mean is almost withdrawing Partagas from the Spanish market, most of it, anyway; I mean, if you put away 2 to 3 million each year...
Perez: We could...
CA: The deal is still pending, or let's say the deal doesn't happen, for whatever reason. When it was announced, it was announced only as an agreement in principle, subject to further negotiation and execution of a definitive agreement. But it essentially outlined a deal of 51 percent ownership for $100 million. What was there--the brands, the distribution, the personnel at General Cigar--that caused you to agree to such a significant price?
Perez: It was not only a question of brands. Of course, as you know, the portfolio of Consolidated is larger than in the case of General Cigar, because they have Montecristo, and others. No, the elements we considered very attractive in the case of General Cigar were, first of all, its position in the market as the leader in the premium segment; in connection with this, its excellent distribution and promotion system; and also, leaving aside the premium element, the efficiency in the machine-made cigars and the efficiency and quality in the handmade cigars. In analyzing all the aspects of the company, we considered General Cigar very attractive. At the same time, its size, which is smaller than Consolidated, was again a positive element for us.
CA: Consolidated was just sold a few years ago. I assume it was sold before the time that you were actively looking, because had it not been, you probably would have considered its acquisition as a possibility. Do you see yourself making further investments in America to build the General Cigar operation? Will there be other brand acquisitions?
Perez: Our strategy at present is to be associated with General Cigar; this is the main target. The 51 percent stake is something. The principal idea is to get an association between Culbro and Tabacalera in order to manage General Cigar and to exploit all the potential that Culbro and Tabacalera can generate together. If this project finally is successful, I think that we may be limited to further expansion because of antitrust legislation.
CA: But that doesn't stop you from product-line extensions or new brands, if you have access to Cuban leaf--to come out with the Pedro Perez Selection, for instance. You can grow internally, limited only by your own supply of tobacco. Isn't that right?
Perez: To grow internally is a goal in any company, but as to the possibility of increasing the size of the project by incorporating other companies, the problem in my view is a legal one with regards to the antitrust laws in America.
CA: What are your thoughts about the future of the premium cigar market, not only in Spain and Cuba, but in the rest of the world?
Perez: I think that the cigar industry is in a great period of recovery. It is perhaps the only segment in the whole tobacco industry with such a recovery. This is a fact in the United States; it's also a fact in Europe. I see a clear future for this particular part of the industry. Premium handmade cigars are the key to sustaining any recovery in the tobacco business. More and more people will continue to discover the pleasure of fine handmade cigars. And once the consumer is enjoying this product, he or she is going to be tempted to taste and try not only the handmade cigars but the whole range of cigar products.
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